National CineMedia, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
National CineMedia, Inc. is the publicly traded holding company of National CineMedia, LLC, which operates a digital in-theatre advertising network in North America. Revenue is generated primarily from advertising shown in theatres operated by AMC, Regal, Cinemark and network affiliates under long-term agreements. The filing covers the three and six months ended June 30, 2016, compared with July 2, 2015. Results are unaudited and subject to seasonality.
- Founding-member exhibition services agreements had approximately 21 years remaining at June 30, 2016.
- NCM, Inc. owned 43.6% of NCM LLC; the remaining membership units were held by AMC, Regal and Cinemark.
- The network included 20,471 screens and 344.5 million reported theatre attendees for the first six months.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $115.4 million | $121.5 million | $191.6 million | $198.4 million |
| Operating income | $46.5 million | $55.4 million | $52.3 million | $38.7 million |
| Consolidated net income | $25.5 million | $33.3 million | $17.0 million | $3.1 million |
| Net income attributable to NCM, Inc. | $6.8 million | $10.1 million | $2.5 million | $1.1 million |
| Adjusted OIBDA | $59.4 million | $67.4 million | $83.4 million | $95.1 million |
| Adjusted OIBDA margin | 51.5% | 55.5% | 43.5% | 47.9% |
| Basic/diluted EPS | $0.11 | $0.17 | $0.04 | $0.02 |
- GAAP operating margin was approximately 40.3% in Q2 and 27.3% for the first six months. Net income attributable to NCM, Inc. represented approximately 5.9% and 1.3% of revenue, respectively.
- National advertising revenue declined 6.2% in Q2 and 4.4% year to date, while local and regional advertising revenue increased 5.4% and 3.8%, respectively.
- Q2 attendance declined 10.2% to 172.2 million; year-to-date attendance declined 2.5% to 344.5 million.
- National advertising CPM increased 7.1% in Q2 and 7.4% year to date, but impressions sold decreased 16.2% and 15.1%, respectively.
- Operating cash flow was $45.9 million for the first six months, compared with $10.2 million in the prior-year period. Investing cash flow was $(0.8) million and financing cash flow was $(59.4) million.
- Cash and cash equivalents were $17.4 million at June 30, 2016. Cash, cash equivalents and marketable securities totaled $64.4 million, and revolver availability was $103.0 million, for reported total liquidity of $167.4 million.
- Total borrowings were $942.0 million, consisting of a $72.0 million revolver, $270.0 million of term loans, $200.0 million of 7.875% senior unsecured notes and $400.0 million of 6.000% senior secured notes. Carrying value of long-term debt was $932.4 million.
- The senior secured credit facility matures in 2019; the senior unsecured notes mature in 2021 and the senior secured notes in 2022. The company reported a 3.5x net senior secured leverage ratio versus a 6.5x covenant limit.
Material changes versus the prior comparable period
- Q2 revenue fell 5.0%, operating income fell 16.1%, Adjusted OIBDA fell 11.9%, and NCM, Inc. attributable net income fell 32.7%.
- Year-to-date revenue fell 3.4%, but operating income increased 35.1% and attributable net income increased from $1.1 million to $2.5 million.
- The year-to-date comparison benefited from the absence of $34.3 million of Screenvision merger termination and related costs recorded in the first half of 2015.
- Underlying Q2 operating expenses before merger-related costs increased 5.7%, driven primarily by higher selling and marketing, administrative, depreciation and amortization costs.
- Six-month selling and marketing costs increased 14.2%, and administrative and other costs increased 42.9%, including higher share-based compensation, $3.2 million of CEO transition costs and a $0.7 million investment impairment charge.
- NCM, Inc.’s ownership of NCM LLC decreased from 43.8% at December 31, 2015 to 43.6%, increasing the portion of consolidated income attributable to noncontrolling interests.
- The revolving credit facility was expanded by $40.0 million to $175.0 million in May 2016.
Outlook, commentary, risks and unusual items
Management did not provide specific revenue or earnings guidance in the filing. Management stated that NCM LLC’s operating cash flow and cash on hand should be sufficient for working capital, debt service, capital expenditures and other requirements for the next twelve months. The company expects cash distributions, existing cash and marketable securities to fund taxes, tax receivable agreement payments and declared dividends, subject to board discretion and future performance.
- Management cited lower content-partner spending and client churn as primary drivers of the decline in national impressions sold. Higher CPMs and branded-content revenue partly offset the decline.
- Competition from online, mobile, television and other video advertising platforms, lower theatre attendance, changing movie-consumption patterns and reduced advertising demand could pressure results.
- Advertising revenue and cash flow are seasonal, with generally stronger results in the second, third and fourth quarters.
- Approximately 36% of borrowings were variable-rate at June 30, 2016. A 100-basis-point change in applicable market rates would affect annual cash interest expense by approximately $3.4 million.
- The company had no outstanding derivatives; the variable-rate term loan and revolver were unhedged.
- Minimum revenue guarantees to network affiliates could require future payments of up to $38.6 million over remaining contract terms; no liability was recorded because expected revenue shares exceeded the guarantees.
- The company had $157.3 million of current and long-term tax receivable agreement payables to founding members and paid $23.5 million under the agreement during the first quarter.
- On August 3, 2016, the company declared a $0.22 per-share dividend, approximately $13.2 million, payable September 9, 2016.
- Management reported no material changes to previously disclosed risk factors, no material pending litigation and effective disclosure controls as of June 30, 2016.
Important facts for investors to verify
- Whether national advertising demand and impressions sold recover after the Q2 decline, particularly given continued digital and mobile competition.
- The sustainability of higher CPMs and the effect of attendance trends on revenue and theatre access fees.
- Dividend coverage after distributions to founding members, tax receivable agreement payments, capital expenditures, interest and debt repayments.
- Debt covenant headroom, variable-rate exposure and refinancing needs as maturities approach.
- The effect of NCM LLC ownership changes on the share of earnings attributable to NCM, Inc. shareholders.
- Future CEO transition costs, share-based compensation and impairment charges.
- Potential payments under minimum revenue guarantees and the terms of related-party agreements with AMC, Regal and Cinemark.